Child Tax Credit and Growth

http://www.futureofcapitalism.com/2012/01/child-tax-credit-and-growth

The Wall Street Journal has an editorial with a passage faulting Senator Santorum for wanting to expand the child tax credit:

Most disappointing is the Pennsylvanian's proposal to triple the tax credit for children (from $1,000 today), which is a hobby horse of the Christian right. This is social policy masquerading as economics. Unlike a cut in marginal tax rates, a larger tax credit does little for growth because it doesn't change incentives to save, work or invest. It merely rewards taxpayers who have children over those who don't.

Mr. Santorum is essentially agreeing with liberals who think the tax code should be used to pursue social and political goals. Yet a major goal of tax reform is to make the tax code less of a political free-for-all. The best tax code is one that raises the revenue the government needs with the least amount of economic harm and misallocation of resources.

Here's a Journal editorial from back in October about immigration:

Republicans have made immigration control one of their main passions, yet they continue to ignore the economic costs. They claim to champion deregulation and business-led growth, but then they impose new hiring and enforcement burdens on any business's most important assets—its workers.

There's a better way. At the state level, stop treating Mexican fruit pickers like alien invaders. In Congress, overhaul the guest worker program to widen avenues for legal immigration, drop calls for obligatory E-Verify and offer those in the country without papers a way to become legal. The result would be fewer crops rotting in the fields, more jobs for Americans, faster economic growth, and fewer farmers taking their production overseas.

It seems to me to be a blind spot that a newspaper that so clearly grasps how immigrants contribute to faster economic growth could fail to appreciate how children born to Americans contribute to faster economic growth. More people equal more growth, whether they arrive by crossing the border into America or by being born to American citizens. I generally agree with the Journal's idea that the tax code shouldn't be used to pursue social or political goals, but it seems to me that, as the editorial seems to concede in the previous paragraph, growth is a goal that the tax code should pursue.

Now, it may be that there are tax reforms that, on a dollar-for-dollar basis, power more growth than an expansion of the child tax credit would. And it may be, too, that people are better off having whatever children they do or don't want to have for their own personal reasons rather than because of some incentive offered by the government. And it may be, too, that expanding the child tax credit as Mr. Santorum proposes would increase the ranks of those who pay no federal income tax at all and thus have no "skin in the game" in the debate over tax rates or the size of government. So the Journal may be correct that this is a bad idea.

But it's probably overstating it to say the expansion of the child tax credit "does little for growth." Keith Hennessey had a post in 2010 explaining the history of the credit, which began in 1998 at $400 a child, increased in 1999 to $500 a child, increased in 2001 to $600 a child, and increased in 2003 to $1,000 a child. There may have been Wall Street Journal editorials objecting to each of these, but I don't recall them. Some economics graduate student could probably get a Ph.D. for writing a paper linking changes in American family size to the change in the amount of the tax credit. I don't think the family size data is out yet from the 2010 census, but the bureau shows average family size creeping upward to 3.19 for the 2005-2009 period from 3.14 in the 2000 census. "After a decade of steady decline, the number of children under 5 in Manhattan increased more than 26 percent from 2000 to 2004," the New York Times reported back in 2005, adding that, "This increase has perplexed social scientists." Maybe they should look to the tax credit for a possible explanation.

by Ira Stoll  |  Jan 8, 2012 at 10:22 pm Related Topics:  Immigration, Politics, Taxes receive the latest by email: subscribe to the free futureofcapitalism.com mailing list